In our previous article, we looked at some of the trends in the online video industry. To recap, online video consumption is growing at a robust pace, which is fueling the growth in online video ads spend. Advertisers are now increasingly shifting their TV budget from TV to online. Google acquired YouTube in 2006, and since then YouTube has emerged as the most dominant player in the online video industry. However, competition in this industry from companies such as Facebook, AOL and NYT is on the rise. In this article, we will look at the initiatives taken by Google (NASDAQ:GOOG) to keep this competition at bay. Additionally, we will also examine how YouTube can bolster Google’s display ad revenues.

According to comScore, Google currently leads the online video content industry. In July 2013, Google sites were leading the online video content industry and had over 167 million unique viewers for its videos. [1] According to our estimates, YouTube contributes approximately 10% to Google’s value. Net revenues from this division were around $2.8 billion in 2012, and we believe that it will continue to rise and reach around $18 billion by the end of our forecast period. Recently, Google has taken prudent steps to ensure that YouTube will continue to rule the video advertising roost in the future. Some of the factors that support this hypothesis are as follows:

YouTube has global reach: Currently, the U.S contributes 40% to total online ad spent globally. [2] However, online ad spending from other regions is on the rise. YouTube is well positioned to tap into this opportunity. YouTube has over 1 billion monthly unique users and nearly 70% of its traffic comes from outside the U.S. [3]

New ad format to enhance experience: Pre-roll digital video ad format is the most popular format amongst marketers. [4] YouTube recently launched the TrueView ad format that lets a viewer skip pre-roll ads after a certain time frame. Advertisers only pay for an impression if the viewer continues to watch the entire advertising video. While this format enhances the ad experience for a user, it also provides higher return on investment for advertisers. We believe that this ad format will help YouTube in generating higher CPM (also known as RPM) as it can target ads based on viewer preference and charge more for such targeted ads.

Channelization of YouTube: To improve monetization, YouTube is forging partnership with prominent media studios worldwide. The channelization of YouTube is significant as it marks a shift for the platform, from “user generated” content, to include “premium” content. This paves the way for YouTube to evolve into a mega destination of content consumption for a broader TV viewing audience.

Launch of Chromecast dongle: Chromecast allows users to stream videos from a phone or tablet to their TV using Chrome. Much of the growth in online video spending is coming from mobile devices. According to eMarketer, mobile ads share in online video ad spending is expected to increase from 12.6% in 2012 to over 29% by 2017. Furthermore, as casting of videos from mobile devices to large screen TVs gains traction, we anticipate that more users are likely to use mobile devices to watch videos online that will boost the unique visitor count. [5]

YouTube to offer offline viewing: YouTube has recently launched offline video viewing mode for online videos. This feature allows users to add videos to their device to watch for a short period when an internet connection is unavailable. [6] This feature will bring more viewers to its platform, thus increasing the monetization of its video content.

Google To Target TV Ad Dollars

We believe that Google is systematically targeting the TV ad dollars with the launch of these services. We are of the view that the company can charge CPM comparable to TV CPM for ads displayed on premium videos that can be casted on TV screens through mobile devices. Currently, we estimate that CPM for the YouTube division will grow from $3.69 in 2012 to $ 11 by the end of our forecast period. If Google can increase CPM to $18 by the end of our forecast period, our price estimate can rise by 5%.

Additionally, as viewing videos from mobile devices (especially in offline mode) gains traction across the world, we anticipate that unique visitor count for Google will increase. Furthermore, increasing channelization of YouTube will boost the unique user count as viewership for YouTube will rise. The number of unique visitors is vital for Google’s ad revenues as more people visiting the website generally translate into more pages viewed across Google’s websites. We currently project the pageviews per user to rise from 116 to 177 per month by the end of our forecast period. If the pageview per user were to reach 220 per month due to the adoption of these services, this would increase our price estimate by an additional 3%.

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